Morgan Stanley’s Michael Wilson said the stress in the banking system marks what’s likely to be a painful and “vicious” start of an end to the bear market in US stocks.
“With the back-stopping of bank deposits by the US Federal Reserve (Fed)/Federal Deposit Insurance Corp, many equity investors are asking if this is another form of quantitative easing and therefore ‘risk on’,” the strategist — who correctly predicted the sell-off in stocks last year and the rebound in October — wrote in a note. “We argue it’s not, and instead represents the beginning of the end of the bear market, as falling credit availability squeezes growth out of the economy.”
The S&P 500 will remain unattractive until equity risk premium climbs to as high as 400 basis points, from the current 230 level, according to Wilson, who is known for being one of Wall Street’s staunchest bears, Bloomberg reported.
“The last part of the bear can be vicious and highly correlated,” he said. “Prices fall sharply via an equity risk premium spike that is very hard to prevent or defend in one’s portfolio.”
The collapse of Silicon Valley Bank and the sell-off of Credit Suisse Group AG shares have fuelled concerns about the health of the global financial system this month, roiling markets. US futures were steady on Monday (March 20), as investors assessed the impact of UBS Group AG agreeing to buy Credit Suisse and looked forward to Wednesday’s Fed rate decision.
“This is exactly how bear markets end — an unforeseen catalyst that is obvious in hindsight forces market participants to acknowledge what has been right in front of them the entire time,” Wilson wrote.
The ongoing turmoil in the banking system should lead investors to focus on the deteriorating growth outlook amid restrictive credit conditions, according to Wilson. “The events of the past week mean that credit availability is decreasing for a wide swath of the economy, which may be the catalyst that finally convinces market participants that earnings estimates are too high,” he wrote, adding that the risk of a credit crunch had increased materially.
Wilson expects analysts to slash expectations as the reporting season approaches, while corporates prepare to lower guidance in a notable way, he said.
The strategist recommends positioning in defensive, low-beta sectors and stocks, while cautioning against the view that megacap technology shares are immune to growth concerns.